NOTE 2 GOING CONCERN:
The Companys financial
statements for the nine months ended November 30, 2012 have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities in the normal course of business. The Company has incurred net losses since entering
the oil and gas exploration industry and as of November 30, 2012 has an accumulated deficit of $25,632,922 and a working capital
deficit of $3,467,469 which raises substantial doubt about the Companys ability to continue as a going concern.
Management Plans to Continue
as a Going Concern
The Company continues to implement
plans to enhance its ability to continue as a going concern. Daybreak currently has a net revenue interest in 11 producing wells
in its East Slopes Project located in Kern County, California (the East Slopes Project). The revenue from these wells
has created a steady and reliable source of revenue for the Company. Daybreaks average working interest in these wells is
36.14% and the average net revenue interest is 26.86% in these same wells.
The Company anticipates revenues
will continue to increase as it participates in the drilling of more wells in the East Slopes Project. Daybreak plans to continue
its development drilling program at a rate that is compatible with its cash flow and funding opportunities.
In the last few years, the Company
has disposed of properties in Alabama, Louisiana and Texas that impeded cash flow and growth in the East Slopes Project. These
actions have allowed the Company to move forward with a drilling and exploration program in Kern County, California.
The Companys sources
of funds in the past have included the debt or equity markets and, while the Company has a reliable revenue flow from
its oil properties, it has not yet established a positive cash flow on a company-wide basis. It may be necessary for the
Company to obtain additional funding from the private or public debt or equity markets in the future. However the Company
cannot offer any assurance that the Company will be successful in executing the aforementioned plans to continue as a going
On October 31, 2012,
the Company finalized a loan with a third party that will fund the Companys near-term development and exploratory
well drilling program at its East Slopes Project in Kern County, California. The Company plans to drill five development
wells in the next six months. Refer to the discussion under Note 8 for further information on the loan with the third
The Companys financial
statements as of November 30, 2012 do not include any adjustments that might result from the Companys inability to implement
or execute the plans to improve its ability to continue as a going concern.